Submitting to the jurisdiction of a particular court in cross border disputes could be a tactical error, expert says

Out-Law Analysis | 29 Apr 2015 | 3:53 pm | 6 min. read

FOCUS: Parties involved in complex cross-border disputes should be wary of submitting to the jurisdiction of a particular court, even if only to challenge a claim perceived as illegitimate. Doing so without giving proper thought to all the implications could potentially prove fatal to their case.

Three recent judgments handed down by the courts of England and Wales go some way towards clarifying the circumstances in which a party will be considered to have submitted to the jurisdiction of the English or a foreign court, with potentially severe consequences. In one case, a shipping company lost the right to resist enforcement of a Chinese judgment in England, even though that judgment was obtained in breach of an arbitration agreement. In two other cases, parties lost the right to claim the protection of state immunity from legal action.

What is clear from these cases is that parties with a choice - either between two competing jurisdictions, or between submitting to or claiming immunity from the jurisdiction of one court - have to make that choice and then adhere to it. By seeking to have it both ways, parties risk making a tactical error and losing valuable protection.

SBV and the Bank of China

In the most recent of these cases, the Commercial Court found that a Chinese court judgment against SBV, one of the largest shipping companies in the Netherlands, was enforceable in England – even though the Chinese proceedings had been brought in breach of a contractual provision referring any disputes to arbitration. The Bank of China was nevertheless ordered to honour guarantees issued in support of the two shipbuilding contracts in dispute, even though the parties in whose favour they had been issued had been found liable for fraud in relation to the installation of second-hand engines, because the guarantees were in the nature of performance bonds.

–The  important point to draw from the case is that, by choosing to fully defend the claims against it in the Chinese proceedings after its jurisdiction challenges failed, SBV had to be treated as having "otherwise submit[ted]" to the jurisdiction of the Chinese courts under the 1982 Civil Jurisdiction and Judgments Act. The Commercial Court in England therefore had no general discretion on whether to recognise the Chinese court judgment, and was similarly unable to refuse to recognise the judgment for public policy reasons due to its having been granted in breach of the arbitration agreement.

The case demonstrates the perils of parties allowing themselves to be dragged into legal proceedings outside the EU  - different rules apply within the EU - to which they have not agreed, and in foreign jurisdictions where they have no physical presence. In these circumstances, as long as they do no more than challenge the jurisdiction of the foreign court, their assets will be protected as the foreign court's judgment will not be enforceable in England - but, as soon as they attempt to defend the foreign proceedings on the merits, this valuable protection is lost.

Businesses facing such foreign legal proceedings must therefore be sure to seek local legal advice, and to consider this carefully, before submitting to the jurisdiction of the court. Where there is a risk of losing the foreign case - or where there are doubts about the competence or fairness of the foreign court - then taking no substantive part in the foreign proceedings may be a better option, at least where the assets at risk of enforcement are in England or another jurisdiction which takes a similar approach.

The sinking of the Prestige

In January the French and Spanish governments similarly found that they had committed a tactical error by opting to challenge the jurisdiction of an arbitrator  in court rather than simply by claiming immunity. In this case, which arose out of the sinking of the tanker Prestige off the coast of France and Spain in 2002, the respective governments were found to have waived their state immunity by applying for relief under the 1996 Arbitration Act which went beyond merely claiming immunity.

The issue here was that the French and Spanish governments had attempted to claim compensation directly from the ship's protection and indemnity insurers or  'club' , under a provision in the Spanish penal code allowing direct claims against insurers. Although the club accepted liability for claims for pollution damage under the International Convention on Civil Liability for Bunker Oil Pollution Damage (CLC), it said that  other claims could be enforced only by arbitration, in accordance with the club rules.

The club started arbitration in London, seeking declarations that France and Spain were bound by its rules, in particular a 'pay to be paid' clause. France and Spain did not take part in the arbitration, and the declarations were granted. The club then applied to enforce the declarations as judgments of the High Court, which France and Spain opposed on the basis that they were entitled to state immunity . However, they also issued their own applications seeking further declarations that the arbitration awards were made without jurisdiction. These additional applications were enough to cost them their immunity claims.

Upholding the decision of the High Court, the Court of Appeal found that although the rights of Spain and France to claim compensation originated in the Spanish penal code, they were essentially contractual rights and so subject to the club rules. In addition, by making their own applications to challenge the arbitrator's jurisdiction, both France and Spain took a "step in the proceedings" other than for the purpose of claiming immunity, meaning they had submitted to English jurisdiction under the 1978 State Immunity Act.

Discontinuance as an abuse of process

In another recent case on jurisdiction and state immunity, the High Court had to decide whether Pakistan had waived its right to state immunity by beginning legal proceedings - and whether it was then entitled to try to preserve that immunity by discontinuing the proceedings. The dispute involved the rightful ownership of what was then £1 million paid to the newly independent state of Pakistan in 1948 by the Nizam of Hyderbad, one of the larger 'princely states' with nominal independence before the partition of India.

On partition, the princely states were given the option of joining the newly-formed countries of India or Pakistan, or of remaining independent. Hyderbad chose independence, but the territory was forcibly incorporated into India. The Nizam had previously paid the £1 million into an account at Natwest Bank in the name of the first High Commissioner of Pakistan, possibly with the intention of preventing the money from falling into the hands of the Indian state. His attempts to reverse the payment led to court proceedings, which were stayed on the grounds of Pakistan's state immunity in 1958. Since then, various descendants of the now-deceased Nizam have claimed to be entitled to the money, while the bank has insisted that it will pay out only on the basis of an agreement between all interested parties or an order of the court.

In 2013, Pakistan attempted to lift the stay in the original proceedings, but a judge held that it could not do so without waiving its state immunity. Pakistan's High Commissioner then started fresh proceedings against the bank, claiming to be entitled to the money. At this point, the bank informed all the interested parties that it intended to 'interplead', which would require the court to decide which of them had the best claim to the money. Pakistan then attempted to discontinue its whole claim - leading to a further legal challenge.

Mr Justice Henderson, ruling on the challenge to the discontinuance, said that he had "little hesitation" in finding that Pakistan's application was intended to protect the sovereign immunity it had waived when it started proceedings against the bank in 2013. Pakistan's attempt to then revoke that waiver was therefore an "abuse of process", designed to give it a tactical advantage by placing it in a better position than that to which it had submitted by starting the proceedings in the first place. The notice of discontinuance was therefore set aside, with Pakistan forced to continue the proceedings without the protection of state immunity.

The latter two cases likewise show that a party seeking the protection of state immunity cannot at the same time ask the court to determine an issue on its merits. By doing so, it will be taken to have submitted to the court's jurisdiction and its immunity will be lost.

Richard Dickman is an expert in complex commercial litigation and international arbitration at Pinsent Masons, the law firm behind Out-Law.com.